Disconnect Operations and Financials

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A sound Planning and Budgeting process must contain both operational and financial information, as well as inputs from managers with responsible for these independent sets of data. This creates the opportunity for disconnects that can minimize the usefulness and add frustration to the development and monitoring processes.

Viewpoint A

Summary: Disconnects between operations and the financials can often be the result of differing points of view, and a day-to-day quantitative focus versus periodic summary focus. Recognizing the different languages used by these separate groups and inherently different cycles is important to any successful Planning & Budgeting process. Symptoms include: Budgets not useful for running the business, detracts from daily operations, and the perception that Planning & Budgeting is not "real work". More...

Viewpoint B

Summary: The Planning & Budgeting process should serve multiple purposes including; planning the strategy, and tracking how well the organization is implementing or delivering on that strategy. As such it should contain both financial and operational information which requires the engagement of both operations and financial managers. Disconnects can develop between how a budget was developed/presented and the actual operations on the ground. More...

Viewpoint C

Summary: The size of the organization or company has a direct impact on the complexity of the planning and budgeting process. This increased complexity creates opportunities for disconnects between operations and the financials. Depending on the planning and budgeting strategy, some people may be involved in the planning and budgeting process by virtue of forecasting resources but they may not be held responsible for the actual dollars associated with any function or process. More...

Benchmarks, Resources, Recommendations, Implications

Viewpoint A

Operating managers deal with process details on a day-to-day basis. These process details are usually quantitative rather than financial. They live with this day-to-day quantitative focus. In contrast, financial managers deal with summary information on periodic intervals. Further, combining process information from radically different processes is impossible without a common denominator. The common denominator is money since ultimately resources are acquired with money outflows and revenues are money inflows. These facts of life drive what appear to be two different languages: operating and financial.

While each of the different languages has its distinct purpose, they also drive some dysfunctional behaviors when each “speaker” fails to recognize the other’s purpose and distinctive features. Many of these behaviors show up in planning and budgeting.

Symptoms of these behaviors include: “Budgets are not useful to running the business.” – Operational personnel will not easily relate to a planning and budget process that solely incorporates financial measures because they will not recognize the processes and measure that they use on a daily basis. They cannot buy into a planning & budgeting process that they cannot understand. On the other hand, when operational personnel fail to recognize and appreciate the financial consequences of their processes, the entire business suffers. An effective P&B will provide translation between operational and financial languages. Financial measure that cannot be translated should be discarded or discontinued. Measure must be relevant on both sides of the “language” barrier.

“Detracts from daily operational business” – From an operational viewpoint, a P&B process that consumes a disproportional amount of their time compared to the value that they see coming from it will detract from their principal work. From the financial side, the P&B process must be carefully tuned to respect operational time and to maximize operational value.

“P&B is not the “real” work” – Of course pure financial measures aren’t the real work: they are symptoms of the “real work”. However, as in treatment of a disease or in improving health, observation and management of symptoms should lead to a beneficial treatment of the underlying //operational// causes. In the extreme, an effective but costly process may bankrupt the entire enterprise. P&B is part of the governance process required in any organization. It cannot be ignored since if “we fail to plan – we plan to fail”. An effective operational manager must manage both the underlying process and its financial symptoms. Financial personnel must avoid budgets and data that are only financial or that are in terms that seem unrelated to operations. Operating personnel justifiably do not relate to financial allocations that don’t have a cause and effect basis or that are just to achieve a “fully allocated” cost.

A P&B process must recognize that there are inherently different cycles between operations and financial processes. An annual P&B process does not have the immediacy of daily operations. An annual P&B process has the assured risk that knowledge of processes will be forgotten and that job assignments or roles will change. A P&B process must compensate for the continual evolution of operations and environmental change. Budgetary measure that do not recognize these changes will become irrelevant and then risk being ignored or the object of derision.

As operational and financial managers confront these issues and recognize the role of the other’s //language,// they will work together to achieve the appropriate balance for their organization. (as)

Viewpoint B

Budgets serve multiple purposes. They give an organization the opportunity to develop and plan its strategy and determine how well it is implementing the strategy. The budget should have financial and operational information (performance, workload, market share, etc.) to show how the planned resources will help an organization make progress toward its stated goals. Budgeting also has a role in reporting – as a budget is executed, an organization can monitor how it is performing against its strategy. Information on the progress should be provided to the appropriate managers to help them see how they are performing compared to the expectations set forth in the budget. In this respect, the budget should be relevant for operations. This requires that the right people have access to information so they can monitor against the plan and take the appropriate action to make corrections as needed. For public entities, the reporting actual performance compared to the budget can be important reporting progress to stakeholders (shareholders, public). This could be in matter of financial performance (e.g., profit, cost per share) or operational performance (e.g., improved safety, higher test scores).

Unfortunately, many people see a significant disconnect between how a budget is developed/presented and the actual operations “on the ground”. This can occur for various reasons. If the operational managers/staff were not involved in the process, they might not feel any ownership of the results. The resulting budget might be inaccurate because of this lack of involvement, perhaps due to faulty assumptions or lack of connection to important business drivers, cost/rate information, etc. Other complaints are that the process/format and level of detail in the budget make it difficult to relate to actual operations. This perceived lack of value during budget execution eliminates an important function of the budget – monitoring performance (financial and operational) against the plan (budget). Workload/driver based forecasting is an example of how operational data "generates" financial projections with a transparent linkage.

Of course, there are complaints in addition to the perceived disconnect between the budget and operational reality. These are more general complaints about how the budget is developed and its true value. These include complaints that there is too much politics involved in the budget process; those who play the game well get rewarded while “true needs” go unaddressed. Also, the budget process may become a vehicle (or trap) for issues that are not truly related to the budget but go unaddressed in other arenas. Those running the budget process may have too much power and develop a sense of self-importance, thus making the budget process more political and time consuming. The budget process also creates additional workload for operational units, thus detracting from their “real work”.

Due to the issues/complaints discussed above, budgeting is often viewed as low value, regarded as an unimportant administrative or reporting function. Any budget-related work receives lower priority and is addressed if/when time permits. Attempts to improve the budget process through training or other means may not be effective because of these views. Also, because of the seasonality of the budget process, training and expertise are difficult to develop/maintain. (rb)

Viewpoint C

As some research has shown, there are usually relationships between how much time companies spend in their budgeting process and the size of the company. Naturally, small companies with fewer than 100 people have a smaller organizational make-up and their organizations are closer to the actual production of products and services. The larger the company, the more complex the hierarchy and therefore organizations become further away from the actual processes that produce products and services. Larger companies have functional organizations that support multiple products and services. As those organizations develop into silo type disciplines, they become so far removed from production processes they lose visibility where they fit within the “end-to-end” value added processes that produce products and services. At some point, those organizations become known as Support or Overhead Organizations and are treated as allocations to the more direct cost that produce products and services.

As the organization chart grows, companies will implement different levels of management within the organization and their budgeting strategy will dictate the level at which budget responsibility rests. In some cases, the first line manager will not have budget responsibility in terms of Dollars, but yet are probably held responsible for the level of FTE’s required for that part of the operation. When the budget is used as part of the annual compensation formula, lower level management may already be disconnected as bonuses are usually not part of the lower level management compensation package.

Companies must define and communicate their budgeting strategies, define organizational relationships to their revenue producing product/service lines, determine the level of budget delegation, and define the operational metrics that will provide ongoing visibility to the operational organizations and financial visibility for those with budget responsibility.

Depending on the planning and budgeting strategy, some people may be involved in the planning and budgeting process by virtue of forecasting resources but they may not be held responsible for the actual dollars associated with any function or process.

Bottom Line: The size of the company is directly related to the complexity of the planning and budgeting process. (nf)

Benchmarks

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Resources

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Recommendations

  • Establish good formal communication and understanding within all levels of management so that each level of management understands their accountability and responsibility in the planning and budgeting process.
  • The strongest financial personnel are those who understand the underlying operations; the strongest operating personnel are those who understand the resulting financial impacts of operating decisions. Develop and train personnel with these skill sets from both sides of the disconnect. Better yet, integrate financial personnel into operating teams.
  • Identify financial and operating cycle gaps then synchronize cycles to the extent possible. Recognize the impact of what cannot be synchronized.
  • Establish a common set of assumptions that span both operational and financial requirements. Establish a recognized authority for shared assumptions.
  • Establish linkages between planning and budgeting financial measures/targets with the underlying workload and performance levels. This can be accomplished with driver based planning and budgeting as discussed in "The Closed Loop"

Implications

(1) Budgets are not useful to running business (2) Doesn’t help me run my business (3) Is not the “real” work (4) Only a budget office thing (5) Just for reporting (6) Low relevance to operational issues (7) My boss says I don’t have to pay attention (8) Detracts from daily operational business (9) The right data should be available to the right people (10) Budgets should translate drivers (11) Created for multiple purposes (12) Performance vs cost (13) There is a correct amount of politics (14) Multiple views of what the language of business is (15) Budgeting should have relevance to operational issues (16) Does not add value to executers (17) P&B process should incorporate both financial & operational measures (18) Its just a support function (19) Does not have operational buy in (20) Assumptions/drivers made up by budget staff (21) Not stated in the language of the business (22) Less accuracy and value from the budget (23) Why work on the process since it is low value (24) People will not master it (25) Training is forgotten before the next cycle (26) Budgeting should not include politics (27) Managers have no tool for empowerment in budgeting (28) Budgets can serve as a tool for managers (29) It’s cuttable – Optional (30) Budgeting has a role in reporting (31) Those who play the budget game well get promoted (32) Creates feelings of self importance (33) Creates shadow staffs outside the P&B organization (34) Deals with issues/baggage that are not budget issues (35) May not change annual budget for performance measurement


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